Ekonomske analize
China

China

Population 1 373,490 billion
GDP 8 141 US$
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Synthesis

major macro economic indicators

  2014 2015 2016 2017 (f)
GDP growth* (%) 7.3 6.9 6.7 6.7
Inflation (yearly average) (%) 2.0 1.4 2.0 2.0
Budget balance** (% GDP) -0.9 -2.8 -3.7 -3.7
Current account balance (% GDP) 2.2 2.7 1.8 1.4
Public debt** (% GDP) 39.9 42.6 46.2 49.3

 

(f) Forecast

STRENGTHS

  • Sovereign risk contained: public debt mainly domestic and denominated in local currency
  • Reduced risk of external over indebtedness thanks to the high level of foreign exchange reserves and to the maintenance of a current account surplus
  • Gradual move upmarket made in China 2025 strategy to boost high-value added output,  
  • Services and infrastructure developments

WEAKNESSES

  • Credit risks remain a cause of concern. High corporate indebtedness will have an impact on growth
  • Overcapacity concerns in certain industrial sectors will continue to drag on profits
  • Exposure of banks to rising corporate debt levels and deterioration in asset quality
  • Government’s strategy is ambiguous on arbitrating between reform and growth
  • Environmental issues
  • Ageing population and gradual depletion of cheap labour pool

Risk assessment

 

The Chinese economy is not expected to rebound in 2017

After a stabilisation in the second half of 2016, the economy expanded at a faster-than-expected pace of 6.9% YoY in the first and in the second quarters of 2017. However, there are signs of growth moderation, brought about by more restrictive policies aimed at curbing asset bubble risks. In particular, monetary policy has become tighter, with the People’s Bank of China (PBOC) stepping in to raise money rates up by 10 basis points in the first quarter. The authorities have also stepped in to curb housing price speculation in major cities. The effects of a cooling property sector have yet to materialize into a slowdown in the real economy, but we expect that these will drag on growth in the second half of the year. Consumption, which accounts for two-thirds of GDP, remains sluggish but will be supported by relatively low inflation rates (+1.4 % YoY in the first half of the year) and expansionary fiscal policy. Fiscal policy will continue to be accommodative in the remainder of this year. Tax burdens on businesses are expected to ease on the back of tax reductions. However, rising levels of corporate indebtedness coupled with overcapacity concerns in some sectors (cement, aluminium, chemicals, ship building, etc.) will put pressure on profits. This will act as a drag on already slowing levels of private investment.

 

Downward pressure on the yuan and willingness to attract foreign investments

External trade has been dynamic in the first half of the year, with exports in USD increasing by approximately 8 %. Exports will continue to benefit from robust demand from developed markets as well as a weaker exchange rate. Indeed, downward pressure on the yuan is expected to continue in 2017, which could help to boost the competitiveness of Chinese exports, but it will not compensate the increase in imports, so that the trade and services surplus will wane. However, thanks to the improvement in the income balance, the current surplus should remain in 2017.

 

In the first quarter of 2017, the Chinese financial account was in surplus for the first time in three years, with an upturn in net non-FDI flows, as a result of a stable yuan against the dollar, but also because of stricter enforcement of capital controls. Even if this surplus is good news, it does not reflect a significant increase in capital inflows. Authorities will continue to tighten the screws to avoid outflows while simultaneously attempting to attract more foreign investment. For example, stock and bond connects between Hong Kong and the two onshore financial centres Shanghai and Shenzhen were inaugurated earlier this year. Moreover, MSCI announced on June 21st that it would include A-shares into its MSCI Emerging Markets Index, which could boost capital inflows. However the impact is expected to be muted relative to the size of capital outflows experienced during the previous years.

 

Increase in indebtedness

The level of local debt is high, and overall indebtedness remains extremely elevated (more than 260 % of GDP at the end of 2016, compared with 160 % in 2008). Most of the debt is held by corporates, a large proportion of which are state-owned enterprises. In addition, debt levels of companies are very difficult to assess, due to the expansion of shadow banking. Moody’s estimates that shadow banking assets grew by 21 % in 2016, to reach 87% of GDP. Credit risk has increased significantly, highlighted by the growing number of defaults on the Chinese bond market. 12 companies have already defaulted on at least one of their bonds since the beginning of 2017. If this trend continues until the end of the year, the number of bond defaults will soar to a new record.

 

Reshuffle of the Politburo

During the 19th National Congress of the Communist Party of China (CPC), to be held in October 2017, all members of the Politburo, excluding the President Xi Jinping and the Prime Minister Li Keqiang, are expected to retire. Stability is of paramount importance for the CPC leadership in the run-up to the power reshuffle at a time when growth rates are decelerating and the country has experienced some bouts social tension and labour unrest.

On the foreign policy front, fears of a full-fledged trade war between the US and China have dissipated, but the new American administration could deploy anti-dumping charges on Chinese goods on a case-by-case basis. The crux of the question in the coming months will be to observe how the relations between China and the US evolve over tensions in the Korean peninsula. Diplomatic tensions surrounding The Hague’s decision to rule in favour of Philippines in a high-level case over China’s activities in the South China Sea have also eased compared to a year ago.

 

Last update : June 2017

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